This month’s Review highlights notable trends and projections in DCG’s Deposits360°® Cross Institution Analytics database and deposit pricing and volume models.
The Fed Pivot Is Upon Us
As this Review goes to press, we find ourselves in a new rate regime. The Fed has cut its policy rate by 50bp, marking the end of the 2022-2024 rate tightening cycle. An inflection point like this does not happen all that frequently. In fact, over the last 20 years, rates have reversed direction only five times.
These inflection points often lead to increasing levels of uncertainty when it comes to deposits pricing. Many institutions assume a “strategic” posture of waiting to see what the competition does. Of course, this is hardly a strategy as it effectively passes the pricing decisions onto competitors that likely have different strategic goals and liquidity needs. There’s no one-size-fits-all strategy when it comes to the most effective way to price deposits as the Fed pivots. Those who can leverage data to isolate and monitor their deposit behavior may have the best chance at navigating the new rate environment.
Interest Rate Trends
With the rate tightening cycle officially behind us, we can now calculate what the observed betas were across product types over the last cycle:
Source: Darling Consulting Group Deposits360°®
It is important to remember that these betas did not materialize in a linear fashion. A significant portion of rate increases did not materialize until the tightening cycle was well underway due to the fact that rates lag at the front end of a cycle. To illustrate, consider the average historical rates for banks and credit unions by major product type.
Source: Darling Consulting Group Deposits360°®
Source: Darling Consulting Group Deposits360°®
It took three rate hikes, or a total of 150bp of tightening, before non-maturity deposit rates began moving meaningfully higher. At that point, the spread between the Fed Funds rate and deposit rates necessitated a more meaningful pricing response to manage attrition. Despite the efforts of many institutions to proactively reduce deposit rates in anticipation of further Fed rate cuts this year, historical data indicates that there may be a lagging impact on total deposit rates in the beginning stages of a new easing cycle.
Balance Trends
The last six months of deposit balance data provided some mixed signals. On one hand, there were signs that non-maturity balances may have been stabilizing. On the other hand, there was a clear trend that growth rates in time deposits were waning. Now that the Fed has delivered a 50bp rate cut and CD pricing has started to trend lower, institutions may find it difficult to maintain the level of CD growth that materialized over the last two years.
Source: Darling Consulting Group Deposits360°®
As institutions budget for deposit growth in 2025, it will be important to understand the impact of potential changes to deposit mix under a variety of rate scenarios. Time deposits as a percentage of total deposits have grown to 27% after being as low as 13% in Q4 2022. If rates continue to fall, CD balances may begin to flow back into premium NMD offerings. In fact, DCG’s CD balance forecast (in beta testing) predicts a balance contraction if rates hold steady or if rates fall 100bp over the next 12 months.
Source: Darling Consulting Group Deposits360°®
Because the market expects rates to continue falling (as evidenced by yield curve inversion on the short end of the yield curve), institutions continue to be incentivized to keep CD Specials short on the term spectrum. In fact, over the last six months, 6-11 Month products outgrew 12-17 Month products and now hold the largest overall balance among CD terms.
Source: Darling Consulting Group Deposits360°®
As more institutions calibrate deposit pricing to today’s lower rate environment, the incentive for depositors to tie up discretionary funds in term deposits should start to diminish. This may necessitate a broader pricing strategy that considers the full range of NMD and CD products in 2025.
Darling Consulting Group will continue to monitor the Cross-Institution data in Deposits360° and bring you insights to help you manage your deposit portfolio.
To learn more about how DCG's Cross-Institution analytics can help drive strategic decision-making, click here.
© 2024 Darling Consulting Group, Inc.
Comments